<PAGE>

=============================================================================== 
                                   FORM 10-Q
                                 UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549
                       __________________________________
 
 
(Mark One)
 
[X]  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
     ACT OF 1934
 
     For the quarter ended September 30, 1998
 
                                              OR
 
[ ]  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
     EXCHANGE ACT OF 1934
 
     For the transition period from ______ to _____

     Commission file number 1-10877


                         TERRA NITROGEN COMPANY, L.P.
             (Exact name of registrant as specified in its charter)

           Delaware                                   73-1389684
(State or other jurisdiction of           (I.R.S. Employer Identification No.)
incorporation or organization)


           Terra Centre
PO Box 6000, 600 Fourth Street
         Sioux City, Iowa                                     51102-6000
(Address of principal executive office)                       (Zip Code)


                        Registrant's telephone number: 
                                (712) 277-1340
                                        
     At the close of business on October 30, 1998, there were 18,501,576 Common
Units outstanding.

     Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
 X  Yes     No
---     ---        
=============================================================================== 
<PAGE>
 
                         PART I. FINANCIAL INFORMATION
                         TERRA NITROGEN COMPANY, L.P.
                          CONSOLIDATED BALANCE SHEETS
                                (in thousands)
                                  (unaudited)
<TABLE>
<CAPTION>
                                                  September 30,  December 31,  September 30,
                                                      1998           1997          1997
                                                  -------------  ------------  -------------
<S>                                               <C>            <C>           <C>
ASSETS
  Current assets:
     Cash and cash equivalents                         $     16      $ 31,268       $  8,120
     Accounts receivable                                  1,718         4,007          8,028
     Inventory -- finished products                      35,389        19,241         26,603
     Inventory -- materials and supplies                 16,253        11,437         13,294
     Prepaid expenses and other current assets            1,597         2,311          2,409
------------------------------------------------       --------      --------       --------
  Total current assets                                   54,973        68,264         58,454
 
  Net property, plant and equipment                     166,817       169,533        170,986
 
  Other assets                                           13,136        16,031         18,515
------------------------------------------------       --------      --------       --------
 
  Total assets                                         $234,926      $253,828       $247,955
================================================       ========      ========       ========
 
LIABILITIES AND PARTNERS' CAPITAL
 
  Current liabilities:
     Short-term note payable                           $ 18,778      $    ---       $    ---
     Accounts payable and accrued liabilities          $ 21,321        26,524         37,445
     Customer prepayments                                    84         4,746            304
     Current portion of long-term debt and
      capital lease obligations                           1,105         1,070          1,059
------------------------------------------------       --------      --------       --------
  Total current liabilities                              41,288        32,340         38,808
 
  Long-term debt and capital lease obligations            8,439         8,966          9,527
  Long-term payable to affiliates                         5,521         4,687            ---
  Other long-term obligations                             1,060         1,060          1,060
  Partners' capital                                     178,618       206,775        198,560
------------------------------------------------       --------      --------       --------
 
  Total liabilities and partners' capital              $234,926      $253,828       $247,955
================================================       ========      ========       ========
</TABLE>

See accompanying notes.

                                                                               2
<PAGE>
 

                         TERRA NITROGEN COMPANY, L.P.
                       CONSOLIDATED STATEMENTS OF INCOME
                    (in thousands, except per unit amounts)
                                  (unaudited)

<TABLE>
<CAPTION>
                                   Three Months Ended        Nine Months Ended
                                     September 30,             September 30,
                                    1998       1997           1998       1997
                                   -------    -------       --------   --------
<S>                                <C>        <C>           <C>        <C>
Revenues                           $33,306    $76,732       $182,327   $255,952
Other income                           303        388          1,029        948
-------------------------------------------------------------------------------
Total revenues                      33,609     77,120        183,356    256,900

Cost of goods sold                  26,851     54,993        136,776    157,756
-------------------------------------------------------------------------------

Gross profit                         6,758     22,127         46,580     99,144
Operating expenses                   2,124      3,192          7,636      9,394
-------------------------------------------------------------------------------

Operating income                     4,634     18,935         38,944     89,750

Interest expense                      (422)      (553)        (1,647)    (1,571)
Interest income                        460        337          1,342      3,269
-------------------------------------------------------------------------------

Net income                         $ 4,672    $18,719       $ 38,639   $ 91,448
===============================================================================

Net income allocable to
 limited partners' interest        $ 4,581    $14,394       $ 30,491   $ 64,480
===============================================================================

Net income per limited
 partnership unit                  $  0.25    $  0.78       $   1.65   $   3.46
===============================================================================
</TABLE>

See accompanying notes.

                                                                               3
<PAGE>
 

                         TERRA NITROGEN COMPANY, L.P.
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                                (in thousands)
                                  (unaudited)

<TABLE>
<CAPTION>
                                                                       Nine Months Ended
                                                                         September 30,
                                                                       1998        1997
                                                                     --------    ---------
<S>                                                                  <C>         <C>
Operating activities:

  Net income                                                         $ 38,639    $  91,448
  Adjustments to reconcile net income to net cash
   provided by operating activities:
    Depreciation and amortization                                       9,217        8,862
    Changes in operating assets and liabilities:
      Receivables                                                       2,289        3,026
      Inventories                                                     (20,964)     (10,199)
      Prepaid expenses                                                    714          (56)
      Accounts payable, accrued liabilities and
       customer prepayments                                            (9,865)     (19,917)
    Change in other assets                                              2,895          ---
    Other                                                                 837        7,116
------------------------------------------------------------------------------------------

Net cash provided by operating activities                              23,762       80,280

Net cash used in investing activities:

  Capital expenditures                                                 (6,503)      (7,158)

Financing activities:

  Proceeds from elimination of distribution reserve fund                  ---       18,480
  Borrowings under revolving credit agreement or from Affiliates       18,778        7,000
  Repayment of long-term debt and capital lease obligations              (493)        (612)
  Redemption of Senior Preference Units                                   ---       (6,605)
  Partnership distributions                                           (66,796)    (130,027)
------------------------------------------------------------------------------------------
Net cash used in financing activities                                 (48,511)    (111,764)
------------------------------------------------------------------------------------------

Net increase in cash and cash equivalents                             (31,252)     (38,642)
Cash and cash equivalents at beginning of period                       31,268       46,762
------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period                           $     16    $   8,120
==========================================================================================
</TABLE>

See accompanying notes.

                                                                               4
<PAGE>
 

                         TERRA NITROGEN COMPANY, L.P.

            Notes to Consolidated Financial Statements (unaudited)


1.   Basis of Presentation

     The consolidated financial statements contained herein should be read in
     conjunction with the consolidated financial statements and notes thereto
     contained in the Terra Nitrogen Company, L.P. ("TNCLP") Annual Report on
     Form 10-K for the year ended December 31, 1997. TNCLP and its operating
     partnership subsidiary, Terra Nitrogen, Limited Partnership (the "Operating
     Partnership"), are referred to herein, collectively, as the "Partnership".

     The accompanying unaudited consolidated financial statements reflect all
     adjustments that are, in the opinion of management, necessary for the fair
     statement of the results for the periods presented. All of these
     adjustments are of a normal and recurring nature. Results for the quarter
     are not necessarily indicative of future financial results of the
     Partnership.

     Net income per limited partnership unit is computed by dividing net income,
     less a 24% and 31% share allocable to the General Partner for the nine
     months ended September 30, 1998 and 1997, respectively, by 18,501,576
     limited partner units. The net income allocated to the General Partner
     decreased to 24% during the nine months ended September 30, 1998 due to the
     reduction in Available Cash distributed to the General Partner. According
     to the Agreement of Limited Partnership of TNCLP, net income is allocated
     to the General Partner and the Limited Partners in each taxable year in the
     same proportion as Available Cash for such taxable year was distributed to
     the General Partner and the Limited Partners. If there is no cash
     distribution, net income or loss is allocated to the Limited Partners and
     the General Partner based on their respective ownership percentages.
     Distributions of Available Cash are made 98% to the Limited Partners and 2%
     to the General Partner, except that the General Partner is entitled, as an
     incentive, to larger percentage interests (up to 50%) to the extent that
     distributions of Available Cash exceed specified target levels. Available
     Cash for the nine months ended September 30, 1998 decreased $8.1 million
     from the nine months ended September 30, 1997 due primarily to lower net
     income in 1998. In addition, 1997 Available Cash included $18.5 million
     from the elimination of the Reserve Amount during 1997 (see Note 2).

2.   Distributions to Unitholders

     The Partnership makes quarterly cash distributions to Unitholders and the
     General Partner in an amount equal to 100% of its Available Cash (as this
     and other capitalized terms are defined in the Partnership Agreement).

                                                                               5
<PAGE>
 
     The quarterly cash distributions paid to the Units and to the General
     Partner applicable to 1998 and 1997 were as follows:

<TABLE>
<CAPTION>
                                 Senior Preference Units           Common Units              General Partner
                               ----------------------------------------------------------------------------------
                                 Total (000s)  $ Per Unit    Total (000s)  $ Per Unit    Total (000s)  $ Per Unit
                                 ------------  ----------    ------------  ----------    ------------  ----------
 
1998:
<S>                              <C>           <C>           <C>           <C>           <C>           <C>
   First Quarter                      $   --       $   --        $21,647        $1.17        $ 3,431       $  --
   Second Quarter                         --           --             --           --             --          --
   Third Quarter                          --           --         31,822         1.72          9,895          --
1997:
   First Quarter                         186         .605         27,752         1.50         10,477          --
   Second Quarter                        186         .605         18,872         1.02          1,835          --
   Third Quarter                          --           --         44,034         2.38         26,686          --
   Fourth Quarter                         --           --          5,366          .29            109          --
</TABLE>

     The distributions paid in the first and second quarters of 1997 to the
     holders of the Senior Preference Units ("SPUs") represented an amount equal
     to the minimum quarterly distribution ("MQD") for each quarter. Non-
     converting SPU holders were not entitled to participate in cash
     distributions in excess of the MQD after December 31, 1996.

     The Reserve Amount of $18.5 million (included in cash and cash equivalents
     at March 31, 1997) was distributed out of Available Cash on May 27, 1997 to
     holders of the Common Units and to the General Partner. Since the non-
     converted SPUs were redeemed on May 27, 1997, the Reserve Amount was no
     longer required to be maintained.

3.   Cash and cash equivalents

     The Partnership has demand deposit and demand note with an affiliate to
     allow for excess Partnership cash to be deposited with or funds to be
     borrowed from Terra Capital, Inc., the parent of the General Partner. The
     balance is due on demand and at September 30, 1998 the interest rate was
     7.1%. The amount of the demand note was $18.8 million at September 30,
     1998.

4.   Natural gas costs

     The Partnership's natural gas procurement policy is to effectively fix or
     cap the price of between 40% and 80% of its natural gas requirements for
     one-year period and up to 50% of its natural gas requirements for the
     subsequent two-year period through supply contracts, financial derivatives
     and other forward pricing techniques. These contracts reference physical
     natural gas prices or appropriate NYMEX futures contract prices. Contract
     physical prices are frequently based on the Henry Hub Louisiana price, but
     natural gas supplies for the Partnership's production facilities are
     physically purchased from various suppliers which often creates a location
     basis differential between the contract price and the physical price of
     natural gas. Accordingly, the use of financial derivatives may not exactly
     offset the change in the price of physical gas. The contracts are traded in
     months forward and settlement dates are scheduled to coincide with gas
     purchases during that future period.

                                                                               6
<PAGE>
 
   The Partnership has entered into firm contract to minimize the risk of
   interruption or curtailment of natural gas supplies. Additionally, the
   Partnership has entered into forward pricing positions for a substantial
   portion of its natural gas requirements for the remainder of 1998, 1999 and
   2000, consistent with its policy. As a result of its policies, the
   Partnership has reduced the potential adverse financial impact of natural gas
   price increases during the forward pricing period, but conversely, if natural
   gas prices were to fall, the Partnership will incur higher costs. Unrealized
   gains from forward pricing positions totaled $9.4 million and $29.2 million
   as of September 30, 1998 and 1997, respectively. The amount recognized by the
   Partnership will be dependent on prices in effect at the time of settlement.

   For the first nine months of 1998 and 1997, natural gas hedging activities
   produced cost savings of approximately $5.5 million and $15.1 million,
   respectively, compared with spot prices.

                                                                               7
<PAGE>
 
        Management's Discussion and Analysis of Financial Condition and
                             Results of Operations
                                        
                             RESULTS OF OPERATIONS
                                        
             Three months ended September 30, 1998, compared with
                     three months ended September 30, 1997

                                        
Volumes and prices for the three-month periods ended September 30, 1998 and 1997
were as follows:

<TABLE>
<CAPTION>
                                      1998                                       1997
                         ----------------------------           -----------------------------------
                             Sales          Average                 Sales               Average
                            Volumes        Unit Price              Volumes             Unit Price
                           (000 tons)       ($/ton)              (000 tons)             ($/ton)
                          ------------    -----------           -------------       ---------------

<S>                       <C>             <C>                   <C>                 <C>
Ammonia                        83             128                    122                  175
UAN                           207              64                    562                   73
Urea                           77             121                    116                  122
</TABLE>

Revenues for the quarter ended September 30, 1998 declined $43.5 million, or
56%, compared with the same quarter in 1997 due to lower nitrogen prices and
volumes for all Partnership products. Surplus worldwide nitrogen production
continued to put pressure on prices during the 1998 quarter resulting in price
reductions of 27%, 12% and 1% for ammonia, UAN and urea, respectively, compared
with the 1997 quarter. Volumes were less than the comparable quarter a year ago
due to customers' decisions to delay purchases to fill storage and lower demand
for winter wheat acres due to drought conditions and the impact of poor wheat
prices.

Cost of goods sold as a percentage of revenues increased to 80% for the 1998
quarter from 71% in the 1997 period primarily due to the lower nitrogen selling
prices as gas costs increased only slightly during the 1998 quarter compared
with the 1997 quarter. The Partnership's natural gas forward pricing activities
produced $.4 million in cost savings during the 1998 period compared with $4.0
million in the 1997 quarter.

Interest income increased $123,000 compared with the 1997 period due to lower
average levels of cash and short-term investments in 1998.

                                                                               8
<PAGE>
 

              Nine months ended September 30, 1998, compared with
                     nine months ended September 30, 1997


Volumes and prices for the nine-month periods ended September 30, 1998 and 1997
were as follows:

<TABLE>
<CAPTION>
                                 1998                             1997
                        -----------------------          -----------------------
                          Sales       Average              Sales       Average
                         Volumes     Unit Price           Volumes     Unit Price
                        (000 tons)    ($/ton)            (000 tons)    ($/ton)
                        ----------   ----------          ----------   ----------
<S>                     <C>          <C>                 <C>          <C>
Ammonia                     301         141                  375         189
UAN                       1,455          67                1,525          85
Urea                        339         124                  364         150
</TABLE>

Revenues for the nine months ended September 30, 1998 declined $73.5 million, or
29%, compared with the 1997 period due to lower nitrogen prices and volumes for
all Partnership products. Surplus worldwide nitrogen production caused nitrogen
prices to fall from prior year levels by 25%, 21% and 17% for ammonia, UAN and
urea, respectively. Worldwide urea prices have declined due to a lack of
purchases by China, a major purchaser of urea in the world markets. Increased
urea production in China and the addition of increased nitrogen production in
other parts of the world have led to an oversupply of nitrogen and caused prices
to decline from prior year levels.

Year-to-date sales volume decreases were primarily attributable to the third
quarter customer delays in purchasing to fill storage and lower demand caused by
drought conditions and lower crop prices.

Cost of goods sold as a percentage of revenues increased to 75% for the first
nine months of 1998 compared with 61% for the 1997 period primarily due to the
lower nitrogen selling prices as gas costs decreased only slightly during the
nine months ended June 30, 1998. The Partnership's natural gas forward pricing
activities produced $5.5 million in cost savings during the 1998 period compared
with $15.1 million for the nine months ended September 30, 1997.

Interest income decreased $1.9 million compared with the 1997 period due to
lower levels of cash and short-term investments from lower earnings and due to
the elimination of the Reserve Amount as a result of the redemption of the non-
converted SPUs during the second quarter of 1997.

                                                                               9
<PAGE>
 

                        Capital Resources and Liquidity

                                        
Net cash provided by operating activities for the first nine months of 1998 was
$23.8 million, a decrease of $56.5 million compared with the 1997 period. The
reduction in cash provided by operating activities was principally due to lower
net income in 1998.

The Partnership's principal needs for funds are for support of its working
capital, distributions to Partners, and capital expenditures. The Partnership
intends to fund such needs primarily from net cash provided by operating
activities and, to the extent permitted thereunder, from funds available under
the Operating Partnership's revolving credit facility. Under certain
circumstances an affiliate of the Partnership may advance funds to the
Partnership under a demand note. At September 30, 1998, the Operating
Partnership had $18.0 million of unused borrowing capacity under its revolving
credit facility, and had $18.8 million outstanding under a demand note with an
affiliate. The Partnership believes that such sources of funds will be adequate
to meet the Partnership's working capital needs, make quarterly distributions to
Partners and fund the Partnership's capital expenditures for at least the next
twelve months.

Quarterly distributions to the Partners of TNCLP are based on Available Cash for
the quarter as defined in the Agreement of Limited Partnership of TNCLP.
Available Cash is defined generally as all cash receipts less all cash
disbursements, adjusted for changes in certain reserves established as the
General Partner determines in its reasonable discretion to be necessary.
Distributions on the Common Units are cumulative to the extent that, for any
calendar quarter, if a distribution of at least $.605 is not paid to the holders
of the Common Units, the amount of the shortfall (plus any arrearages from prior
quarters) will be paid out of Available Cash in subsequent quarters before any
incentive distributions are paid to the General Partner. During the first nine
months of 1998, the Partnership paid $66.8 million in distributions to its
Partners. As of September 30, 1998, there is no distribution arrearage for the
Common Units.

On October 22, 1998, Terra Nitrogen Company, L.P. announced there would be no
cash distribution for the quarter ended September 30, 1998 since there was no
Available Cash for distribution for the quarter.

Finished products inventory increased $16.1 million and $8.8 million from the
December 31, 1997 and the September 30, 1997 balances, respectively, primarily
due to substantially lower than anticipated UAN sales volumes during the third
quarter of 1998.

Accounts payable and accrued liabilities declined $16.1 million from the
September 30, 1997 balance principally due to the timing of cash transfers
between the Partnership and its affiliates.

Customer prepayments declined $4.7 million from the December 31, 1997 balance.
Certain customers prepay for product during the fall and winter months to take
advantage of generally favorable pricing conditions. The customers then take
delivery of the product as needed during the spring planting season.

                             Capital Expenditures
                                        
Capital expenditures totaled $6.5 million for the first nine months of 1998. For
the remainder of 1998, the Partnership plans to spend approximately $1 million.
Plans for 1998 include urea storage and loading improvements at the Blytheville
plant and environmental control, equipment replacement and efficiency
improvements at both plants.

                                                                              10
<PAGE>
 

                                Year 2000 Issue
                                        

The Year 2000 issue concerns computer programs that use only the last two digits
to identify the year in date fields. If not corrected, many of these computer
programs could fail or produce erroneous results on or before January 1, 2000.
This issue affects virtually every company.

The Partnership has assigned dedicated resources to address its Year 2000
issues. Most, but not all, of the Partnership's management information systems
environment have been assessed for Year 2000 issues and some remedial actions
have been identified in these assessed areas. The impact of remedial actions for
areas where an assessment has already been completed is not expected to be
material to the Partnership. Some of these actions have already been completed
at minimal cost.

The Partnership plans to complete in the first quarter of 1999 an organization-
wide review of all possible computing functions, including the process control
systems and instrumentation in the manufacturing facilities. The Partnership is
also assessing Year 2000 issues in relation to its customers, suppliers and
other constituents because the actions or inactions of such third parties may
materially affect the Partnership. General contingency planning efforts have
recently been initiated for precautionary purposes.

The Partnership anticipates that it will complete all assessment, remediation,
testing and contingency planning efforts for Year 2000 issues in the third
quarter of 1999 with no material adverse consequences or material costs to the
Partnership. However, the costs or consequences of incomplete or untimely
resolution of Year 2000 issues by the Partnership or third parties could have a
material adverse affect on the Partnership.

                              Limited Call Right
                                        
If at any time not more than 25% of the Common Units are held by non-affiliates
of the General Partner, either TNCLP, the General Partner or its affiliates may
call all such outstanding units held by non-affiliated persons in accordance
with the terms of the TNCLP partnership agreement. TNCLP is required to give at
least 30 but not more than 60 days notice of its decision to purchase the
outstanding Common Units. The purchase price per unit is required to be the
greater of (1) the average of the previous twenty trading days closing prices as
of the date five days before the purchase is announced or (2) the highest price
paid by the General Partner or any of its affiliates for any unit within 90 days
preceding the date the purchase is announced.

The General Partner and its affiliates own 69% of the Common Units as of October
31, 1998. Under existing authorization of the board of directors of Terra
Industries, Inc., the indirect parent of the General Partner, additional Common
Units may be purchased on the open market and through privately negotiated
transactions by affiliates of the General Partner to bring this ownership level
above 75%. Although TNCLP and its affiliates reserve the right to consider in
the future whether to acquire all of the Common Units, they do not have any
present plan or intention to do so.

                                                                              11
<PAGE>
 

                          FORWARD LOOKING PRECAUTIONS
                          ---------------------------


Information contained in this report, other than historical information, may be
considered forward looking. Forward looking information reflects Management's
current views of future events and financial performance that involve a number
of risks and uncertainties. The factors that could cause actual results to
differ materially include, but are not limited to the following: general
economic conditions within the agricultural industry, competitive factors and
price changes (principally, sales prices of nitrogen and methanol products and
natural gas costs), changes in product mix, changes in the seasonality of demand
patterns, changes in weather conditions, changes in agricultural regulations,
and other risks detailed in the Corporation's Securities and Exchange Commission
filings, in particular the "Factors that Affect Operating Results" section of
its most recent Form 10-K.

                          Part II. Other Information

Item 5. Other Matters

        On October 15, 1998 Minorco, the majority shareholder of Terra
        Industries, Inc., announced its intention to sell its stake in Terra
        Industries by early 1999. Terra Industries is the indirect parent of the
        General Partner and the indirect majority owner of approximately 70% of
        Terra Nitrogen Company, L.P.

Item 6. Exhibits and Reports on Form 8-K

        (a) Exhibits:

        10.68 Amendment No. 1 dated as of September 30, 1998 to the Amended and
        Restated Credit Agreement dated as of March 31, 1998 among Terra
        Capital, Inc.; Terra Nitrogen, L.P.; Nations Bank, N.A.; The Chase
        Manhattan Bank; and Citibank, N.A., filed as Exhibit 4.5 to Terra
        Industries Inc. Form 10-Q for the period ended September 30,1 998 (File
        No. 1-8520), is incorporated herein by reference.

        10.69 Demand Promissory Note dated August 26, 1998 from Terra Nitrogen,
        L.P., as Payor, to Terra Capital Inc.

        27    Financial Data Schedule. (EDGAR only)

        (b) Reports on Form 8-K:
 
        None.

                                                                              12
<PAGE>
 

                                   SIGNATURE


     Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.


                                                  TERRA NITROGEN COMPANY, L.P.
                                              
                                              By: TERRA NITROGEN CORPORATION
                                                  as General Partner
                                              
                                              
                                              By: /s/ Francis G. Meyer
                                                  ------------------------------
                                                  Vice President
                                                  (Principal Accounting Officer)


Date: November 12, 1998

                                                                              13